Life Insurance Bonus Calculation
A bonus is simply an additional sum of money or reward you receive in addition to your base compensation. A similar idea is shared by life insurance providers, who give policyholders bonuses each year in addition to the minimum sum assured to which they are entitled (depending on the type of policy they have). Depending on the terms and conditions of your policy, this additional sum may be paid out either at policy maturity or upon the insured's demise.
A life insurance company uses the premiums paid by policyholders as part of its accumulated assets, which are used to cover claims in the future. The profit, which the insurer distributes as bonus payments at the completion of the financial year or policy maturity, is generated by the insurer's claim experience and returns on investment combined. The extra amount coming from extra asset valuation is what creates the bonus.
An Illustration of How Bonus is Calculated?
Bonus is either computed as a percentage of the sum assured or as a certain amount per ₹1000 of the sum assured. For example, if the bonus is ₹50 per ₹1000 for a policy with a sum assured of ₹1 lakh, the annual bonus will be ₹5000. For a policy term of 10 years, the simple reversionary bonus will be ₹50,000. The bonus rate depends on several factors, such as return on company assets, bonuses declared in the previous year, claims filed, expected interest rates in the future, and several other estimates.
It is important to highlight that only owners of participating life insurance policies are eligible for bonuses. This applies to traditional plans such as endowment or money-back plans. However, in some cases, the insurer may choose to forgo the bonus and instead offer a guaranteed benefit to the insured. This guaranteed amount is clearly mentioned at the time of policy purchase. When buying a life insurance plan, carefully review the policy documentation and verify the benefits provided by the insurer, including any bonuses, if any
